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Foreign Exchange Benchmarks - Financial Stability …

Foreign Exchange Benchmarks Report on progress in implementing the September 2014 recommendations 1 October 2015. Contents Page 1. Introduction .. 1. 2. Progress Against the Recommendations .. 1. benchmark methodology .. 1. Execution of benchmark transactions .. 3. Market conduct .. 6. Index providers and asset managers .. 7. Central bank reference rates .. 7. 3. Data Analysis .. 8. 4. Conclusion .. 13. Appendix A: Foreign Exchange Committees and Authorities 14. Appendix B: Data analysis for additional currency pairs .. 15. ii 1. Introduction In 2013, concerns were raised about the integrity of Foreign Exchange (FX) rate Benchmarks .

Foreign Exchange Benchmarks . Report on progress in implementing the September 2014 recommendations . 1 October 2015

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Transcription of Foreign Exchange Benchmarks - Financial Stability …

1 Foreign Exchange Benchmarks Report on progress in implementing the September 2014 recommendations 1 October 2015. Contents Page 1. Introduction .. 1. 2. Progress Against the Recommendations .. 1. benchmark methodology .. 1. Execution of benchmark transactions .. 3. Market conduct .. 6. Index providers and asset managers .. 7. Central bank reference rates .. 7. 3. Data Analysis .. 8. 4. Conclusion .. 13. Appendix A: Foreign Exchange Committees and Authorities 14. Appendix B: Data analysis for additional currency pairs .. 15. ii 1. Introduction In 2013, concerns were raised about the integrity of Foreign Exchange (FX) rate Benchmarks .

2 These concerns stemmed particularly from the incentives for potential market malpractice linked to the structure of trading around the benchmark fixings. As a result, the FSB formed a working group chaired by Guy Debelle of the Reserve Bank of Australia and Paul Fisher of the Bank of England to focus on FX Benchmarks . 1 The mandate of the Foreign Exchange benchmark Group (FXBG) was to undertake analysis of the FX market structure and incentives that may promote particular types of trading activity around the benchmark fixings. The group was tasked to propose possible remedies to address these adverse incentives as well as to examine whether there was a need and scope to improve the construction of the Benchmarks themselves.

3 After extensive consultation with many parts of the FX industry across the globe, the group prepared a report which contained fifteen recommendations to achieve these goals. These recommendations were endorsed by the FSB at its meeting in Cairns in September 2014 and the report was published later that month. 2. Following a letter summarising progress from the chair of the FXBG, in March 2015 the FSB. Chair wrote to a number of Foreign Exchange committees (FXCs) seeking their assistance in providing a broad assessment of market participants' progress in implementing the FX.

4 benchmark report's recommendations as at 30 June 2015. This report summarises the information gathered by the FXCs, as well as by central banks in other large FX centres. 3. The overall assessment of this report is that there has been good progress in implementing many of the September 2014 recommendations, although on some, the progress has been mixed. In particular, it is worth re-emphasising that the recommendations are intended to apply to all FX Benchmarks , to ensure more widespread implementation. The recommendations in the FX Benchmarks report can be divided into four categories: benchmark methodology; execution of benchmark transactions; market conduct; and guidance on central bank reference rates.

5 Section 2 provides assessments of the progress against each set of recommendations. Section 3 presents an analysis of the behaviour of the FX market around the London 4pm fixing window following the changes to the window in February 2015, and compares it to that prevailing before the changes which was described in the earlier report. Section 4 summarises the main findings. 2. Progress Against the Recommendations benchmark methodology The September 2014 FX Benchmarks report made four recommendations about the calculation of benchmark rates, mostly pertaining to WM who calculates the London 4pm fix (the most widely used FX benchmark rate).

6 1. Paul Fisher subsequently changed roles; hence the work for this report was chaired only by Guy Debelle. 2. FSB (2014), Foreign Exchange Benchmarks : final report, September; available at: 3. See Appendix A for the FXCs, central banks and other agencies that contributed to this report. 1. Recommendations 1 4 from September 2014 report 1. The group recommended the fixing window be widened from its width of one minute. 2. The group recommended that WM should incorporate price feeds and transactions data from a broader range of sources to further increase its coverage of the FX.

7 Market during the fixing window, provided it is assured that the additional sources are of sufficient quality and are representative of the market. WM should regularly assess its coverage as market structure continues to evolve. 3. WM should expand its consultation activities to include a named user group to consider the proposed changes to the calculation methodology and to ensure it remains appropriate going forward. 4. The group supported the findings of the IOSCO review of WM and endorses the recommendations for improvement contained in that review. 4. While WM has been constructive in their response to the recommendations contained in the report, there is scope for it to follow through more completely on a number of them.

8 On 15 February 2015, WM widened the window used to calculate benchmark rates from 1 minute for traded' currencies and 2 minutes for non-traded' currencies, to 5 minutes for all currency pairs. Section 3 provides an analysis of the effect of the widening of the window on the FX market, noting that this has only been in effect for a few months and hence only includes a small number of month-ends (which is when volume tends to be particularly large). The analysis suggests that the wider window appears to be helping to achieve the intended outcomes. This view is generally shared by both buy-side and sell-side market participants.

9 The wider window has also served to highlight the risk transfer involved in executing fixing transactions. This has facilitated the communication, both externally and internally, of charging for fixing transactions described below. That said, some respondents question the current one-size-fits-all approach of WM for the time window and would have preferred a more granular approach depending on the liquidity of the underlying currency. Also from February 2015, WM has begun to incorporate more data feeds. 5 In the first instance, this has involved utilising data from Thomson Reuters, Electronic Brokerage Services (EBS) and Currenex in calculating fixes for a number of currency pairs.

10 On 15 February 2015, the incorporation of Thomson Reuters Matching (TRM) data across four additional currency pairs (EUR/USD, EUR/CHF, USD/JPY, and USD/RUB) was approved by the WM Board and Oversight Committee. There is, however, scope for WM to include more data feeds beyond these, provided they are of sufficient quality. To this end, WM is in the process of evaluating a number of platform providers, including EBS, with initial due diligence and data analysis underway. WM has indicated their intention to form a user group with a remit to review and comment on proposed changes to the policies and methodologies which WM uses to calculate, administer 4.


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